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February 11, 2013

Frank Talk With Vanguard’s Advisory Chief

Martha King on how the firm makes product decisions, works with advisors and blunts the power of index providers

One of the small compensations for journalists attending investment conferences, where panel discussions can at times degenerate into speakers starting to sound a little too alike, is the ability to meet with executives in a side lounge and maybe get a fresher perspective.

It’s not that Martha King, the head of Vanguard’s advisory business, dropped any news bombs during our sidehall meeting at IndexUniverse's Inside ETFs conference. King is too smart to be induced to say something that should be protected from industry competitors. (She politely bypassed my question about the financial terms of Vanguard’s new licensing agreements with the CRSP and FTSE indexes.)

But there’s less guardedness in a face-to-face meeting and that just makes it easier to cut through the formulaic responses one comes to expect from the various sages on stages.

About those new indexes, for example. Vanguard shook up the indexing universe in October when it announced it was ending its relationship with MSCI as the provider of indexes for 22 of its ETFs, switching instead to University of Chicago-affiliated CRISP and the Financial Times’ FTSE indexes.

While trumpeting the firm’s smooth execution of the transition, she frankly acknowledged there were some clients who complained and wanted to move on to what they regarded as greener pastures. She said the firm anticipated this from the outset as a consequence of a business changing vendors.

The move was planned long in advance. “Vanguard doesn’t do anything precipitously,” King said.

While Vanguard made it clear the move was aimed at maintaining the firm’s vaunted low-cost value proposition into the future, King was—once again—quite open about the unpretty sausage-making process in the ETF world:

“There has been a shift in power toward benchmark providers and they have been increasing the fees that they charge, particularly in a market where discernible differences are harder and harder to find,” the Vanguard executive said. “Usually where that happens in an industry, prices come down. But that has not been happening here.”

With the change in index vendors, “we now have cost certainly,” King said. (It was here that she declined my question on how much those costs were and for how long they could be expected to remain.)

On another cost-related issue—that of rival Charles Schwab Corp.’s newly launched commission-free trading platform—King was dismissive of the value being offered.

“Take a look at what products are on that platform; it’s not best of breed.” She asked whether an investor wanted something free or would rather have a “best-in-class product and pay a small cost to trade it.”

A final example of King’s unexpected candor concerned Vanguard’s relationship with advisors.

Remember, King is “head of U.S. financial intermediaries” for the fund group, yet the Vanguard exec said that advisor product petitions is actually last on the list of considerations in the firm’s new product decisions.

“Vanguard has a set of product development principles,” King said.

Before the firm seeks advisor input, a product idea “has to have an enduring place in the portfolio. Second, we have to have a benchmark that can invest in it in a high-quality way. Then we have to be able to bring it to market and be highly competitive.”

Listening to advisors, though, is part of the very structure of Vanguard’s outreach efforts, staring with the firm’s decision to have its “field sales people”—what other firms term “wholesalers”—living in the communities they serve.

“Advisors see that as ‘you are really committed to us,’” King says.

The rest is the classic “consultative selling” approach, she adds.

“The fastest way to not be a salesman at Vanguard anymore is to put a client in a product they don’t need.”

It’s all about listening to the advisor, she says. “We have no sales quotas; [the wholesaler] is going to be understanding what the advisor’s trying to do,” she adds.

As for the end user, King stands fast by the firm’s ultimate value proposition, and in that sense her comments were entirely predictable:

“Costs have always mattered,” she says. “Cost is only going to matter more and more. So it’s really the job of the advisor to sort through the myriad products out there. It’s a noisy marketplace.”

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